Petrochemicals: The New Saudi Rage

By David B. OttawayNovember 26, 1984

Here on the sandy Arabian shores of the Persian Gulf, a new Saudi era is dawning. It already promises to thrust this country back onto the world economic stage as a major player even as it loses its leverage over the oil market.

Making use of cheap natural gas, six huge, ultramodern petrochemical plants are beginning operation in this seaside industrial city.

When fully operational, the giant complexes here will be capable of producing 4.4 million tons of petrochemicals a year, a prospect that is already forcing the closure of scores of older plants in Japan, Europe and the United States.

It is also stirring predictions by western petrochemical specialists of a price-cutting bloodbath on the European market next year that will put many more plants in Western Europe out of business.

European companies in particular are up in arms because of the current oversupply of most petrochemical products and the high cost and inefficiency of their own, older plants compared with those here.

"We are not in the market yet, and already they are slashing prices, each one saying, 'Saudi Arabia is coming,' even before we are there," said an amused but somewhat worried Saudi Industry Minister Abdulaziz Zamil in an interview. "It is surprising to see these companies overreacting."

Petrochemicals are used in making building and construction materials, fabrics, soaps and pharmaceuticals. One such chemical, methanol, for example, is a key component in the production of plywood, polyester fiber, film, paints and cigarette filters.

The European Community slapped a 13.5 percent tariff on Saudi methanol just after the first shipments arrived in Europe at midyear. This brought an angry reaction from Zamil, who warned that Saudi Arabia might put tariffs on European goods in retaliation.

For the past two decades, the West has looked upon Saudi Arabia as little more than a vast reservoir of oil with a seemingly unlimited capacity to pump it and thereby dictate world prices almost singlehandedly.

When the Saudis first started talking about building a dozen world-scale industrial plants in the mid-1970s, outsiders derided their "illusions of grandeur" and predicted that the result would be a series of expensive white elephants.

Now, after more than $30 billion of investment in facilities here and in Yanbu on the Red Sea coast, a new Saudi Arabia is emerging, one of ultramodern petrochemical complexes, oil refineries and fertilizer plants with a price edge over competitors anywhere.

"Five years ago, nobody thought this industry would get off the ground. Now it is a reality, and they have to talk about how to accommodate us," said Mohammed H. Mady, senior vice president of Sadaf, the Saudi petrochemical company, a joint $2 billion investment of the Saudi government and Shell Oil Co., U.S.A., that is just getting under way here.

Seven petrochemical plants here and in Yanbu, two fertilizer factories and three export refineries are either finished or scheduled to be within 18 months.

By 1986, Saudi Arabia could be marketing 5.3 million tons of petrochemical products, a million tons of fertilizer and 850,000 barrels a day of refined oil products. While only a tiny fraction of world supply for these products, it is enough, together with other similar Arab industries nearing completion, to have a significant impact.

There are many reasons for the Saudi leverage in the petrochemical industry, although its share of the market is expected to be only 4 or 5 percent:

*Saudi plants are starting up at a time of oversupply, when even a small additional amount is enough to touch off a price war.

*The Saudi plants are of the latest design and preferred size. Almost all are 50-50 partnerships with Japanese and American giants such as Mobil, Exxon, Shell and Mitsubishi, which are providing technology, management and a share of the marketing.

*The industry here will have a tremendous edge in access to the vast supply and low cost of Saudi ethane and methane gas, the main feedstock for the plants.

According to a U.S. Embassy study, "Saudi industry will have a substantial cost advantage over all other petrochemical plants in the world," with methane and ethane available at a fraction of the cost elsewhere.

A western economist here said the Saudi government was selling gas for 50 cents per million British thermal units compared to a world average price of $4.50, prices in Europe of $5 to $5.25 and in Texas of about $3.25.

The Saudis and their western partners say while all this is true, they also face disadvantages. They cite the higher cost of building factories here and the distance from markets, higher start-up outlays for training Saudi workers and building housing for employes.

Sadaf has built 900 homes at $175,000 apiece and trained 600 Saudis, 200 of them for two years in the United States, at a cost of $75,000 each, according to William A. Carpenter Jr., its American president.

The Saudis want no tariffs or quotas on their petrochemicals and are talking about free access to European and all other markets, a subject that will be discussed soon between the European Community and six Arab states of the Persian Gulf.

"We always believe things can be worked out," Zamil said, if the Europeans "look at the whole issue and not just one sector."

By that he meant the entire trade relationship between Saudi Arabia and Europe: the kingdom's $12 billion worth of European imports with little or no tariffs and the Saudi need to compensate for the sharp cut in its oil exports.

"We have a policy to diversify," he said. "Now that we succeed in exporting something other than oil, someone thinks it's a 'threat.' Is industry good only for Europe and Japan and a danger for a developing country?"